SOLUTION MANUAL FOR j i j i
Financial Accounting11thEditionRobertLibby, ji ji ji ji ji
Patricia Libby, Frank Hodge
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Chapter 1 ji
FinancialStatementsandBusinessDecisions ji ji ji ji
ANSWERS TOQUESTIONS ji ji
1. Accounting is a system that collects and processes (analyzes, measures, and
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records) financial information about an organization and reports that information to
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decision makers.
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2. Financial accounting involves preparation of the four basic financial statements and
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related disclosures for external decision makers. Managerial accounting involves the
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preparation of detailed plans, budgets, forecasts, and performance reports for
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internal decision makers.
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3. Financial reports are used by both internal and external groups and individuals. The
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internal groups are comprised of the various managers of the entity. The external
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groups include the owners, investors, creditors, governmental agencies, other
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interested parties, and the public at large.
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4. Investors purchase all or part of a business and hope to gain by receiving part of
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what the company earns and/or selling their ownership interest in the company in
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the future at a higher price than they paid. Creditors lend money to a company for a
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specific length of time and hope to gain by charging interest on the loan.
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,5. In a society, each organization can be defined as a separate accounting entity. An
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accounting entity is the organization for which financial data are to be collected.
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Typical accounting entities are a business, a church, a governmental unit, a
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university and other nonprofit organizations such as a hospital and a welfare
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organization. A business typically is defined and treated as a separate entity because
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the owners, creditors, investors, and other interested parties need to evaluate its
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performance and its potential separately from other entities and from its owners.
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6. Name of Statement ji ji Alternative Title ji
(a) Income Statement ji (a) Statement of Earnings; Statement of
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Income; Statement of Operations ji ji ji
(b) Balance Sheet ji (b) Statement of Financial Position ji ji ji ji
(c) Cash Flow Statement ji ji (c) Statement of Cash Flows ji ji ji ji
7. The heading of each of the four required financial statements should include the
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following:
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(a) Name of the entity ji ji ji
(b) Name of the statement ji ji ji
(c) Date of the statement, or the period of time ji ji ji ji ji ji ji ji
(d) Unit of measure ji ji
8. (a) The purpose of the income statement is to present information about the
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revenues, expenses, and the net income of an entity for a specified period of
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time.
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(b) The purpose of the balance sheet is to report the financial position of an entity at a
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given date, that is, to report information about the assets, liabilities and
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stockholders’ equity of the entity as of a specific date.
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(c) The purpose of the statement of cash flows is to present information about the
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flow of cash into the entity (sources), the flow of cash out of the entity (uses),
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and the net increase or decrease in cash during the period.
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(d) The statement of stockholders’ equity reports the changes in each of the
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company’s stockholders’ equity accounts during the accounting period,
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including issue and repurchase of stock and the way that net income and
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distribution of dividends affected the retained earnings of the company during
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that period.
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9. The income statement and the statement of cash flows are dated ―For the Year
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Ended December 31‖ because they report the inflows and outflows of resources
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during a period of time. In contrast, the balance sheet is dated ―At December 31‖
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because it represents the resources, obligations, and stockholders’ equity at a
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specific date.
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,10. Assets are important to creditors and investors because assets provide a basis for
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judging whether sufficient resources are available to operate the company. Assets
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are also important because they could be sold for cash in the event the company
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goes out of business. Liabilities are important to creditors and investors because
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the company must be able to generate sufficient cash from operations or further
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borrowing to meet the payments required by debt agreements. If a business does
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not pay its creditors, the law may give the creditors the right to force the sale of
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assets sufficient to meet their claims.
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11. Net income is the excess of total revenues over total expenses. Net loss is the
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excess of total expenses over total revenues.
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12. The equation for the income statement is Revenues - Expenses = Net Income (or
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Net Loss if the amount is negative). Thus, the three major items reported on the
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income statement are (1) revenues, (2) expenses, and (3) net income.
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13. The equation for the balance sheet (also known as the basic accounting equation) is:
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Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected) future
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economic benefits owned by the entity as a result of past transactions. They are the
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resources owned by the business at a given point in time such as cash, receivables,
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inventory, machinery, buildings, land, and patents. Liabilities are probable
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(expected) debts or obligations of the entity as a result of past transactions that will
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be paid with assets or services in the future. They are the obligations of the entity
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such as accounts payable, notes payable, and bonds payable. Stockholders’ equity
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is financing provided by owners of the business and operations. It is the claim of the
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owners to the assets of the business after the creditors’ claims have been satisfied. It
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may be thought of as the residual interest because it represents assets minus
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liabilities.
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14. The equation for the statement of cash flows is: Cash flows from operating activities
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+ Cash flows from investing activities + Cash flows from financing activities = Change
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in cash for the period. The net cash flows for the period represent the increase or
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decrease in cash that occurred during the period. Cash flows from operating activities
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are cash flows directly related to earning income (normal business activity including
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interest paid and income taxes paid). Cash flows from investing activities include cash
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flows that are related to the acquisition or sale of productive assets used by the
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company. Cash flows from financing activities are directly related to the financing of
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the enterprise itself.
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15. The retained earnings equation is: Beginning Retained Earnings + Net Income -
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Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
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Retained Earnings which is the prior year’s ending retained earnings reported on
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the balance sheet. The current year's Net Income reported on the income
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statement is added and the current year's Dividends are subtracted from this
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amount. The ending Retained Earnings amount is reported on the end-of-period
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balance sheet.
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, 16. Marketing managers and credit managers use customers' financial statements to ji ji ji ji ji ji ji ji ji
decide whether to extend them credit for their purchases. Purchasing managers use
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potential suppliers' financial statements to judge whether the suppliers have the
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resources necessary to meet current and future demand. Human resource managers
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use financial statements as a basis for contract negotiations, to determine what pay
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rates the company can afford. The net income figure even serves as a basis to pay
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bonuses not only to management, but to other employees through profit sharing
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plans.
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17. The Securities and Exchange Commission (SEC) is the U.S. government agency
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which determines the financial statements that public companies must provide to
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stockholders and the measurement rules used in producing those statements. The
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Financial Accounting Standards Board (FASB) is the private sector body given the
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primary responsibility to work out the detailed rules which become generally
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accepted accounting principles.
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18. Management is responsible for preparing the financial statements and other ji ji ji ji ji ji ji ji ji
information contained in the annual report and for the maintenance of a system of
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internal accounting policies, procedures and controls. These measures are intended
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to provide reasonable assurance, at appropriate cost, that transactions are processed
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in accordance with company authorization as well as properly recorded and reported
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in the financial statements, and that assets are adequately safeguarded. Independent
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auditors examine the financial reports (prepared by management) and the underlying
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records to assure that the reports represent what they claim and conform with
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generally accepted accounting principles (GAAP).
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19. A sole proprietorship is an unincorporated business owned by one individual. A
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partnership is an unincorporated association of two or more individuals to carry on a
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business. A corporation is a business that is organized under the laws of a particular
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state whereby a charter is granted and the entity is authorized to issue shares of stock
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as evidence of ownership by the owners (i.e., stockholders).
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20. A CPA firm normally renders three services: auditing, management advisory
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services, and tax services. Auditing involves examination of the records and financial
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reports to determine whether they―fairly present‖ the financial position and results of
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operations of the entity. Management advisory services involve management advice
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to individual business enterprises and other entities, much like those provided by a
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consulting firm. Tax services involve providing tax planning advice to clients (both
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individuals and businesses) and preparation of their tax returns.
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ANSWERS TOMULTIPLECHOICE ji ji ji
1. b) j i 2. d) j i 3. d) j i 4. c) j i 5. a) j i
6. d) j i 7. a) j i 8. a) j i 9. c) j i 10. b) j i
